RORO - The New Market Paradigm?

timsk

Legendary member
7,390 2,172
Risk On - Risk Off (RORO) is a new way off looking at different asset classes. This video lasting 6 or 7 minutes outlines the basic principles and the report referred to by the interviewee is this one: View attachment Risk On Risk Off.pdf

Clearly, it has implications for large institutions and investment managers, but could it also form the basis of trading strategies for little retail minnows like most of us? Thoughts anyone?
 
  • Like
Reactions: Liquid validity
L

Liquid validity

0 0
Interesting thread :)
I know some laugh at RORO as just another flavour of the month buzzword.
Nevertheless, it does have value.

Yes , there is no reason anyone can't use the same methods.
What I found most interesting was the theory on RORO cause (end page4).
They say RORO is either linked to global uncertainty or RORO will remain indefinitely.

There is a lot of research by Nanex amongst others that could also link the rise in
algo trading to the phenomenon. Question is, are algos just being driven by RORO,
or are they themselves responsible for exacerbating the conditions.
One thing is for sure, they are not responsible, I'm not suggesting that.
I do however think they play a very big part in the lockstep correlations we see.

Is it merely coincidence that algo trading has really taken off from 2007?
It could be argued that the ultra short term HFT approach is just the best way
for a lot of the bigger players to mitigate risk in uncertain markets.

For me, the two are inextricably linked.
If I am right (not that it matters) RORO could remain for as long as algo, in particular HFT trading remains.
 
  • Like
Reactions: timsk

timsk

Legendary member
7,390 2,172
Old news, Timsk.
Not that old s-n-d, the pdf was only published in April! Besides, there are no threads on it that I can see - but it's difficult to search for as the engine appears not to be able to see beyond the word 'risk'. So, if you've investigated RORO and come up with some great insights - hit us with 'em!
(y)
Tim.
 

wackypete2

Legendary member
10,229 2,054
For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.

Liquid validity said:
I know some laugh at RORO as just another flavour of the month buzzword.
Nevertheless, it does have value.

I would almost fit that category :)
The concept does have value, I agree. What is laughable though is that traders believe that RORO is the latest new concept in trading. It isn't, it's just repackaged with a new name.

Peter
 
L

Liquid validity

0 0
For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.



I would almost fit that category :)
The concept does have value, I agree. What is laughable though is that traders believe that RORO is the latest new concept in trading. It isn't, it's just repackaged with a new name.

Peter

Fair points :)
Its not so much RORO I was interested in, more the effects of algo trading in
these conditions.
No surprise that I heavily buy into the research Nanex does.

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity
Thats more of an example of what I was commenting on,
yeah RORO, basket trading, program trading nothing new.
The point I was making is the behaviour of risk aversion / appetite
this time round has been altered by the effects of algo trading.
The above nanex link shows liquidity drying up as if someone hit a switch.

Its those kind of things that are new.
Whether or not anyone cares or is affected is another issue :)
 
  • Like
Reactions: wackypete2

timsk

Legendary member
7,390 2,172
For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.
Hi Peter,
I suspect that Stacey Williams - the author of the pdf - would beg to differ and point you towards the heatmaps to back up his point. The level of correlation between different asset classes is much higher now than it was pre the 2008 banking crises. His assertion that there are investment managers out there who think they have a diversified portfolio but, in reality, have anything but - makes sense to me.

Anyway, regardless of how old the news is and/or whether or not it's just old ideas repackaged with fancy buzzwords, is the basic principle valid and how can retail traders incorporate that principle in their trading to minimise their risk exposure?
Tim.
 

wackypete2

Legendary member
10,229 2,054
timsk said:
The level of correlation between different asset classes is much higher now than it was pre the 2008 banking crises.
Tim, I agree with this. But a higher level of correlation is not anything new, it just a correlation that was tweaked by technology (ie:repackaged) and branded a new name. Liquid Validity makes a good point about risk behavior being altered though.

timsk said:
His assertion that there are investment managers out there who think they have a diversified portfolio but, in reality, have anything but - makes sense to me.
Yes, makes sense. The problem with today's investment managers is many of them did not go through the crash of 1987. Even the best managers back then who thought they had a diversified portfolio didn't fare much better than the average investor who picked 2 or 3 stocks = very high correlation back then. You wouldn't believe how many portfolio managers today don't realize a good diversified portfolio means having cash on hand. When the market is going up, up, up everyone ends up "all in" or near so to get the highest returns. When the markets takes a violent turn these guys suffer badly = poor diversification.

Retail traders are even worse at understanding diversification. Honest to goodness, Tim, I know someone who owns a few stocks and futures and thinks his holdings are diversified. Turns out he has Apple, Google, and Nasdaq index futures. For traders, the way to take advantage of this highly correlated era is to find 2 or more products that always follow an index future. This is actually easier today due to the higher correlation. In a lot of cases one will generally lag the other. No free lunch though and it does take some work.

Peter
 

ZEN archer

Experienced member
1,528 241
Risk On - Risk Off (RORO)

Clearly, it has implications for large institutions and investment managers, but could it also form the basis of trading strategies for little retail minnows like most of us? Thoughts anyone?

I would say POPO (that's a new one - can't be found on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off
 
Last edited:
  • Like
Reactions: Liquid validity
L

Liquid validity

0 0
I would say POPO (that's a new one - can't be find on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off

Thats pretty much what caused the rapid liquidity evaporation shown in the link I posted earlier.

Here is a more normal example of liquidity drying up prior to news:

More examples:
Nanex ~ 29-May-2012 ~ eMini Depth of Book
Nanex ~ 17-May-2012 ~ ES.M12 - 10:00 News/Liquidity Vacuum & Explosion
Nanex ~ 20-Jun-2012 ~ ES.U12 Heat
Nanex ~ 06-Sep-2012 ~ EMini Depth at 8:30am

***************************************************************************************************
***************************************************************************************************

Here's what happened last time helicopter Ben was about to speak:
FRB: September 12-13, 2012 FOMC Meeting

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity - source link.
I doubt anyone believes one firm controls 80% of the ES,
so what other conclusion is there, other than algo's adapting to each others
behaviour in the blink of an eye.

That why I believe this is the real root of the issue.
Yes conditions now are at least as risky now as in the 70's or 30's, maybe more so.
The above kind of behaviour would not have been seen in either of those decades though.

For anyone who thinks yeah who cares what happens a couple of mins before news.
You either don't trade then or have wide enough stops to accomadate the risk
if you are inclined to do so.

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity
There is more to that link than meets the eye.
It is just the most visible grapical representation of algo behaviour in these markets.
How many spikes do you think have occurred due to the same behaviour that go unnoticed...
 
  • Like
Reactions: ZEN archer
L

Liquid validity

0 0
:rolleyes: super wide images have busted the page formatting and can't edit last post :whistling
 

ZEN archer

Experienced member
1,528 241
I would say POPO (that's a new one - can't be foud on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off

I was trying to be funny and realistic at the same time:)

Retail traders can use POPO for their strategies. When Mr Bernanke announces bond buying (printing on), one can try to sell USD to put it simply. The only drawback is that others are printing happy, so may spoil the joy. And of course hated algos and HFT.

That's how I see the markets nowadays - politicians and computers being the major driving force.
 
Last edited:
L

Liquid validity

0 0
I was trying to be funny and realistic at the same time:)

That's how I see the markets nowadays - politicians and computers being the major driving force.

?
I agree with you, I wasn't having a pop :)
Just showing an example of what you said.
 
 
AdBlock Detected

We get it, advertisements are annoying!

But it's thanks to our sponsors that access to Trade2Win remains free for all. By viewing our ads you help us pay our bills, so please support the site and disable your AdBlocker.

I've Disabled AdBlock